Price vs. weather shock hedging for cash crops: ex ante evaluation for cotton producers in Cameroon

Antoine Leblois, Philippe Quirion and Benjamin Sultan ()
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Benjamin Sultan: PARVATI - Processus de la variabilité climatique tropicale et impacts - LOCEAN - Laboratoire d'Océanographie et du Climat : Expérimentations et Approches Numériques - IPSL - Institut Pierre-Simon-Laplace - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - UVSQ - Université de Versailles Saint-Quentin-en-Yvelines - UPMC - Université Pierre et Marie Curie - Paris 6 - CEA - Commissariat à l'énergie atomique et aux énergies alternatives - INSU - CNRS - Institut national des sciences de l'Univers - X - École polytechnique - IP Paris - Institut Polytechnique de Paris - CNES - Centre National d'Études Spatiales [Toulouse] - CNRS - Centre National de la Recherche Scientifique - MNHN - Muséum national d'Histoire naturelle - IRD - Institut de Recherche pour le Développement - UPMC - Université Pierre et Marie Curie - Paris 6 - INSU - CNRS - Institut national des sciences de l'Univers - CNRS - Centre National de la Recherche Scientifique

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Abstract: In the Sudano-sahelian zone, which includes Northern Cameroon, the inter- annual variability of the rainy season is high and irrigation scarce. As a consequence, bad rainy seasons have a detrimental impact on crop yield. In this paper, we assess the risk mitigation capacity of weather index-based insurance for cotton farmers. We compare the ability of various indices, mainly based on daily rainfall, to increase the expected utility of a representative risk-averse farmer. We first give a tractable definition of basis risk and use it to show that weather index-based insurance is associated with a large basis risk, whatever the index considered. It has thus limited potential for income smoothing, a conclusion which is robust to the utility function. Second, in accordance with the existing agronomical literature we find that the length of the cotton growing cycle, in days, is the best performing index considered. Third, we show that using observed cotton sowing dates to define the length of the growing cycle significantly decreases the basis risk, compared to using simulated sowing dates. Finally we find that the gain of the weather-index based insurance is lower than that of hedging against cotton price fluctuations provided by the national cotton company. This casts doubt on the strategy of supporting weather-index insurances in cash crop sectors selling at international market prices without recommending any price stabilisation scheme.

Keywords: price risk; Weather; index-based insurance; cash crop (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-afr, nep-agr, nep-ger, nep-ias and nep-upt
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00967313v1
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Citations: View citations in EconPapers (13)

Published in Ecological Economics, 2014, pp.42. ⟨10.1016/j.ecolecon.2014.02.021⟩

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Related works:
Working Paper: Price vs. weather shock hedging for cash crops: ex ante evaluation for cotton producers in Cameroon (2013)
Working Paper: Price vs. weather shock hedging for cash crops: ex ante evaluation for cotton producers in Cameroon (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:halshs-00967313

DOI: 10.1016/j.ecolecon.2014.02.021

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